Rf Micro Devices, Inc (RFMD) - Description of business

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ITEM 1. BUSINESS.
Introduction

RF Micro Devices, Inc. was incorporated under the laws of the State of North Carolina in 1991. We are a global leader in the design and manufacture of high-performance radio frequency (RF) components and system solutions for mobile communications. Our power amplifiers (PAs), transmit modules, cellular transceivers and transceiver modules and system-on -chip (SoC) solutions enable worldwide mobility, provide enhanced connectivity and support advanced functionality in current- and next-generation mobile devices, cellular base stations, wireless local area networks (WLANs), wireless personal area networks (WPANs) and global positioning systems (GPS). Our diverse portfolio of state-of -the-art semiconductor technologies and industry-leading RF systems expertise positions us as a preferred supplier to the world’s leading mobile device manufacturers which deliver advanced wireless capabilities that satisfy current and future market demands.

We design and manufacture products using all the major applicable semiconductor process technologies available today. We have access to these technologies through internal and external resources. Our approach to using multiple semiconductor process technologies allows us to offer customers products that optimize trade-offs between performance and cost and fulfill their performance, cost and time-to -market requirements. We call this approach Optimum Technology Matching ® .

Our products are purchased by essentially all of the leading handset original equipment manufacturers (OEMs) such as Nokia Corporation, Motorola, Inc., Samsung Electronics Co., Ltd., LG Electronics, Inc., Sony Ericsson Mobile Communications, and BenQ Corporation, which together represent more than 80% of worldwide handset production. In addition, our products are purchased by leading original design manufacturers (ODMs) such as Mitsumi Electric Co., Ltd., Arima Communications Corporation, SIM Technology Group Limited, Curitel Communications, Inc. and its affiliate Pantech, Inc., Compal Electronics, Inc., Foxconn and Chi Mei Communication Systems. ODMs offer design and manufacturing services for the handset market.

We report information as one operating segment. Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures About Segments of an Enterprise and Related Information” (SFAS 131), established standards for the way that public companies report information about operating segments in annual consolidated financial statements. Although we had three business units as of March 31, 2006 (Cellular, Wireless Connectivity and Infrastructure), we report information as one operating segment pursuant to the aggregation criteria set forth in SFAS 131.

Our cellular business product portfolio has expanded from primarily PAs to include other radio functions. We have established ourselves in the transceiver market with our POLARIS tm TOTAL RADIO tm transceiver solutions, which provide handset manufacturers with a reduced-size, highly integrated radio solution that helps reduce component count and total cost while providing superior radio performance. We believe our POLARIS tm  2 TOTAL RADIO tm transceiver solution for Enhanced Data for Global Evolution (EDGE) handsets provides EDGE functionality with fewer components than competing approaches through a unique and innovative architecture called open-loop large signal polar modulation. Our POLARIS tm TOTAL RADIO tm transceiver solutions for global system for mobile communications (GSM)/general packet radio system (GPRS) handsets

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

and EDGE handsets have driven the growth in our transceiver shipments. We expect that multiple GPRS and EDGE phones featuring our POLARIS tm TOTAL RADIO tm transceiver solutions will launch throughout fiscal 2007.

We believe that the size and cost goals of our customers will continue to drive higher levels of integration. Our GSM/ GPRS/ EDGE products are supporting this trend by combining aluminum gallium arsenide pseudomorphic high electron mobility transistor (also referred to as GaAs pHEMT) die to perform the antenna transmit/receive switch function with the PA function in single-placement components referred to as transmit modules. During fiscal 2006, we began shipments of transmit modules and, based on current customers’ forecasts, we expect that revenue from these products will increase during fiscal 2007.

In addition, we expect volume growth in the multi-mode Wideband Code Division Multiple Access (WCDMA) market, which will increase the addressable market of our products due to the increasing RF complexity of these multi-mode handsets. A key reason for this is the fact that most WCDMA handsets operate on both GSM/ GPRS/ EDGE networks and on WCDMA networks. This results in increased semiconductor content in order to provide the transmit and receive functionality on both networks.

Our wireless connectivity business focuses on developing and producing components for WPAN, WLAN and GPS. We are experiencing increased demand for our WLAN products, which include WLAN PAs and front-end modules. We also expect revenue from our WPAN products, which consist of integrated Bluetooth ® radio processors and radio modems primarily for cellular handsets and headsets, will increase during fiscal 2007. The acquisition of Silicon Wave during the first quarter of fiscal 2005 enhanced our Bluetooth ® product portfolio. We have developed a highly integrated SoC Bluetooth ® solution that features Enhanced Data Rate (EDR) and utilizes 0.13 micron complementary metal-oxide-semiconductor (CMOS) that will be sampled to customers in early fiscal 2007. This product consumes less power than current Bluetooth ® products and, as a result of its small size, low power consumption and low materials cost, is specifically designed for mobile phone applications. We have also licensed Near Field Communications (NFC) technology for cellular handset applications, which we believe will enable handsets to perform point of sale financial transactions similar to credit cards. This technology, which we anticipate will be ready for customer sampling during the second half of fiscal 2007, provides secure wireless transactions intended to prevent fraud and minimize identity theft. We have also licensed technology that will allow us to add an FM radio receiver to a Bluetooth ® SoC. This product would permit handset manufacturers to offer both Bluetooth ® with EDR functionality as well as high fidelity reception of FM stereo broadcast entertainment. We expect customer samples will be available in late fiscal 2007. We also recently announced that our new software-based GPS solution is sampling to lead customers. This product enables the integration of high-performance GPS applications in handsets, wireless Personal Digital Assistants (PDAs), digital cameras, personal navigation devices and other cost-sensitive, battery-operated mobile devices.

Our infrastructure business is comprised of wireless infrastructure components, which historically have included a variety of small signal devices including adjustable gain control (AGC) amplifiers, gain blocks, multi-stage amplifiers, low noise amplifiers (LNAs) and quadrature modulators. During fiscal 2006, we introduced a family of infrastructure pre-driver PAs that leverage thermal enhancements made to our aluminum gallium arsenide heterojunction bipolar transistor (also referred to as GaAs HBT) process, enabling low distortion under linear operation. Further, we released several new small signal products including direct-conversion modulators, high dynamic range low noise amplifiers and down converter mixer designs for wireless infrastructure applications. We expect production shipments of these products to continue to grow in fiscal 2007. During fiscal 2007, we also expect to complete process development and reliability testing and release our first generation of gallium nitride (GaN) technology for RF power applications. We plan to use this new technology to design high power amplifiers (HPAs) specifically for use in cellular wireless and Worldwide Interoperability for Microwave Access (WiMax) base stations. We have transitioned a portion of our GaN semiconductor processes from our research and development facility in Charlotte, North Carolina to one of our wafer fabrication facilities in Greensboro, North Carolina, and we expect to transition the remainder of these processes during fiscal 2007.

Industry Overview

The wireless communications industry has grown rapidly as a result of technological advances, changes in telecommunications regulations and the allocation and licensing of additional radio spectrum. These factors continue to stimulate competing wireless communications businesses, the expansion of wireless services into new markets such as China, India, Africa, Eastern Europe and Latin America and the continuing development of new wireless applications and services. Higher data access speeds, multimedia capabilities, simultaneous access to multiple services and global roaming are now common features on wireless devices.

Fueling the rapid growth of the wireless communications industry are multiple telecommunications standards, such as GPRS, EDGE, Code Division Multiple Access Next Generation (CDMA-1X), WCDMA, IEEE 802.11 for WLANs and Bluetooth ® technology. New

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

wireless products with improved features, such as telephones with cameras, Bluetooth ® peripherals, MP3 players and GPS have contributed to the industry growth. In addition, the emergence of new communications services and technologies, such as Voice Over Internet Protocol (VOIP) and public area “hot spots” that facilitate wireless Internet connectivity through the use of WLANs, has increased the demand for wireless communication products.

The total available market for RF products is anticipated to expand as data-intensive networks enable new applications, such as gaming and video services, and as developing markets continue to emerge. Higher data rate handsets that offer higher functionality often contain multiple radios, thereby increasing the market for RF products. At the same time, lower-tier, voice-only handsets that are optimized for emerging markets are driving new subscriber growth, which is also increasing the market for RF products. In more mature markets where handset penetration is relatively high, such as Western Europe and North America, the replacement rate is increasingly important as a market driver. As more innovative products and services are introduced, the replacement rate could increase in both mature and emerging markets, driving continued market growth.

The wireless industry continues to develop new mobile devices that operate on higher data rate air interface standards and offer consumers greater functionality. Classic analog and digital communication standards used primarily for voice, such as Advanced Mobile Phone Service (AMPS), GSM, Time Division Multiple Access (TDMA) and CDMA have been replaced in the design cycle by the emergence of standards such as GPRS, EDGE, CDMA-1X, WCDMA and High Speed Downlink Packet Access (HSDPA). The handsets designed for each air interface standard generally require unique RF and baseband integrated circuit solutions, and these solutions become more complex and technically challenging as data rates increase. Similarly, IEEE 802.11 and Bluetooth ® technologies are migrating to higher data transmission rates.

Given this trend, mobile device manufacturers have decreased their research and development investments in RF products and have increased their focus on newly-available functionality, such as FM radios, MP3 players, cameras, televisions, GPS, e-mail and Java-based applications, thereby increasing their reliance on RF suppliers, such as ourselves. We have continued to sharpen our focus on system-level solutions, and as a result, we expect to further expand our content in mobile devices through sales of high-performance, integrated RF products, including our single-chip complete Bluetooth ® solution, our PowerStar ® family of PA modules and our integrated POLARIS tm TOTAL RADIO tm solutions.

Strategy

Our goal is to be the premier supplier of high-performance RF integrated components and system-level solutions for applications that enable wireless communications. To meet this goal, we have developed a strategy centered on customer relationships, technological innovation and manufacturing excellence which we believe will allow us to continue growing our dollar content within cellular handsets and expand into other wireless markets. We believe executing on our strategy will allow us to achieve better than industry average revenue and earnings growth over the long-term. The key elements are:

•	Customer Relationships. We have established excellent customer relationships with the leading OEMs and ODMs, which positions us to continue our growth. Our ability to increase dollar content within the handset and other wireless devices is driven by the early market intelligence that is shared with us by our customers. This level of trust is earned by providing the customer full support in every facet of the business. We provide our customers with world-class design and application support that is enhanced by our ability to deliver on our manufacturing commitments. We will continue to make investments to fully service the increasing needs of our customers. We believe our customers trust us to develop highly integrated solutions that in many cases have more intellectual property content than the versions previously designed by the customer. In order to increase efficiencies, decrease component count and improve profitability, our customers are reducing their supplier base to include only those with broad product offerings across multiple wireless protocols. Our customers are our top priority and our future is dependent on maintaining strong relationships with them.
•	Technological Innovation. We are technology innovators in several key areas, including circuit design, packaging technology and semiconductor process technology. Our design engineering teams focus on developing products that solve real-world problems for our customers. The products we design are becoming more integrated, and we invest in providing our design engineers with software and modeling tools to complete these more complex products. Additionally, in terms of our employees, we have focused our recruiting efforts on addressing our need for digital design expertise, system-level architecture and software development. This allows us to understand the entire cellular system and develop next generation technologies that focus on reduced size and increased performance at attractive price points. We maintain leadership in packaging technology that allows us to deliver smaller form factor and lower cost solutions to our customers. We continuously strive to make improvements in our GaAs HBT technology for PAs, and our GaAs process expertise has extended to internal development of GaAs

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

	pHEMT for switches. Through our relationship with Jazz Semiconductor, Inc. (Jazz), we invest in silicon process development designed to maximize the high-speed analog performance of silicon CMOS and silicon germanium (SiGe) devices. Other foundries, such as Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics Corporation (UMC) and International Business Machines Corporation (IBM), provide us with access to leading technology in silicon CMOS and SiGe. We also invest in technologies for the future, such as GaN, which we believe offers significant performance advantages over existing silicon-based technologies.
•	Manufacturing Excellence. Our world-class manufacturing capabilities allow us to respond quickly to changes in customer demand, giving us what we believe is a significant competitive advantage. We are the world’s leading manufacturer of GaAs HBT devices and are currently undertaking a 40 percent increase in our GaAs manufacturing capacity. We plan to continue making investments in GaAs HBT and GaAs pHEMT manufacturing capacity as required to meet the growing needs of our customers. Silicon manufacturing capacity is becoming increasingly important for our growth. The silicon percentage of our total shipments has grown significantly due to the production ramp of our highly integrated silicon products, including POLARIS tm TOTAL RADIO tm solutions, silicon power control devices, DC-DC converters, GPS and Bluetooth® products. To address the capacity requirements for these components we have earned top-tier customer status with Jazz, TSMC, UMC and IBM. We have addressed packaging capacity by developing strong relationships with the world’s leading assembly houses. We have invested in our own internal assembly capacity to both increase our revenue and lower our cost structure. Recently, we initiated capital projects to double our internal assembly capacity, which will improve our ability to meet our customer lead times and our overall cost structure. We currently test the majority of our components at our own high-volume, low-cost test facilities. We also outsource a portion of our final product test to certain assembly houses. Finally, we are continuing to focus on reducing manufacturing cycle time. We believe that reducing manufacturing cycle time significantly improves our ability to respond to changes in customer demand and also lowers our inventory levels.

Other elements of our business strategy involve the potential acquisition of technologies, products, assets or businesses that allow us to reduce the time required to develop new technologies and products and bring them to market, complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities.

In fiscal 2005, we completed the acquisition of Silicon Wave, Incorporated. Silicon Wave’s Bluetooth ® product portfolio includes highly integrated, single-chip CMOS solutions, comprised of radio, baseband processor, processor core and memory. Our CMOS Bluetooth ® solutions reduce the requirements for external flash memory and minimize the use of external RF components. Our Bluetooth ® products are used in cellular handsets, headsets, PC peripherals and consumer electronics devices.

During fiscal 2003, we entered into a strategic relationship with Jazz, a privately-held RF and mixed signal silicon wafer foundry, for silicon manufacturing and development. As part of the strategic relationship, we invested $60.0 million in Jazz, which resulted in an approximate 11 percent ownership interest. Within the strategic relationship, we obtained a committed low cost supply of wafers fabricated utilizing Jazz’s silicon manufacturing processes and the ability to collaborate with Jazz on joint process development and the optimization of these processes for fabrication of next-generation silicon products.

Markets

We design, develop, manufacture and market our products to both domestic and international OEMs and ODMs for commercial applications primarily for wireless markets such as cellular handsets, base stations and WLAN equipment.

Cellular Handset In cellular applications, calls are placed through mobile devices by making a connection with a base station via RF channels.

Cellular Infrastructure Base stations are installed across an area to create wireless telecommunications networks that enable cellular telephones to communicate with one another or with wired telephones. Each base station is equipped to receive and send RF signals through an antenna to and from mobile devices.

Wireless Networking Wireless networking involves the transmission and reception of data such as e-mail, faxes, computer files and Internet content by desktop and portable computers and mobile devices via RF links rather than wired lines.

Other Markets In the wireless market, we supply components for wireless local loop systems, cordless telephony, portable gaming systems, industrial radios, satellite radio, GPS, security systems, utility meter reading systems, two-way paging, monitoring devices, interactive toys, PC modem cards, keyless entry and handheld devices used for point-of -sale, bar coding and other applications. In other markets, we supply components for set-top converter boxes and cable modems. We also market various components for satellite, microwave communications and certain wired applications.

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

Manufacturing, Packaging and Testing

Our quality management system is registered to ISO 9001 and our environmental management system is registered to ISO 14001:2004. This means that a third party independent auditor has determined that these systems meet the requirements developed by the International Organization of Standardization, a non-governmental network of the national standards institutes of over 150 countries. The ISO 9001 standards provide models for quality assurance in design/development, production, installation and servicing and the ISO 14001:2004 standards provide a structure within which a company can develop or strengthen its quality system for managing its environmental affairs.

For the majority of our products, the production process begins with GaAs or silicon wafers. Most GaAs products incorporate a transistor layer that is grown on the wafer using a molecular beam epitaxy (MBE) process in our MBE facility. These wafers are sent to our wafer fabrication facility where we isolate the transistor layer and interconnect the transistors according to the circuit design. The wafers are then singulated into individual die. A die is a rectangular piece of semiconductor material upon which electronic circuitry has been created. The circuitry determines the specific function that the die is intended to perform and is connected to the outside world by means of a microelectronic package and small wires. Semiconductor die are manufactured while still part of the wafers, which range in diameter from 100-300mm. The circuitry is printed on the wafers using microscopic imaging technology and thin films of deposited materials. Upon completion of the manufacturing process, die are cut individually from the wafer and must be assembled, or packaged, and then the final product must be tested. Packaging can come in the form of either a simple lead frame package or a more complicated multi-chip module. Our products are 100 percent parametric tested based on the product specifications and, after testing, are prepared for shipment through a tape and reel process.

We have one MBE facility for the manufacture of our GaAs devices, which is located in Greensboro, North Carolina. We have two GaAs wafer fabrication facilities located in Greensboro, North Carolina. During fiscal 2006, we manufactured substantially all of our GaAs HBT products at these fabrication facilities. Our first wafer fabrication facility is a four-inch wafer production facility and our second wafer fabrication facility is a six-inch wafer production facility. In fiscal 2007, we plan to complete an $80.0 million expansion of our wafer fabrication facilities that is expected to increase our wafer manufacturing capacity by approximately 40% as compared to levels at the end of fiscal 2006. This project is currently scheduled to be completed in the third quarter of fiscal 2007 and will enable us to meet continued growth in wireless markets using our GaAs HBT and GaAs pHEMT process technologies and will also enable capacity for our future GaN production. This expansion is also expected to reduce our cost per wafer and increase our internal GaAs pHEMT capacity, which is an important technology for our transmit and front-end modules for both our cellular and wireless networking markets.

Our original GaAs HBT process technology was licensed to us by Northrop Grumman Space Technology (formerly TRW Space & Electronics, Inc.) (Northrop) in 1996 to design and manufacture products for commercial wireless applications. The GaAs HBT and MBE trade secrets were licensed on a perpetual basis, while the patent rights covered by the license agreement expire at various times between March 2007 and July 2016. The license agreement provides that Northrop will offer to us, on the same terms as are offered to third parties, certain future non-HBT related technologies that it develops for a period of 10 years following June 15, 1998. We have agreed to share with Northrop any modifications or improvements that we make in the technology or the products developed therefrom, and to grant Northrop a non-exclusive, royalty-free license to use any of these modifications or improvements in applications outside our field of use. Upon any termination of the license agreement because of a default by either party, our rights to Northrop’s technologies would cease. We are continually improving our GaAs HBT processes and manufacture substantially all of our own GaAs HBT products at our wafer fabrication facilities.

We also are continuing to explore additional process technologies. We expect to release our first generation of GaN process technology during fiscal 2007 with which we plan to design HPAs specifically for use in cellular wireless and WiMax base stations.

We currently use several external assembly suppliers, as well as our internal assembly facility in Beijing, China, to package and assemble our products. In fiscal 2006, we announced the expansion of our internal assembly operations. The expansion, which is expected to be online during the second quarter of fiscal 2007, is expected to increase our internal assembly capacity by over 100% as compared to our internal assembly capacity at the end of fiscal 2006. We believe that by increasing our internal assembly capacity, we will strengthen our supply chain and reduce manufacturing costs, thereby contributing to our ongoing initiatives to increase our profitability. We also believe that the increased use of our internal assembly operation will result in better inventory management. We currently have our own test and tape and reel facilities located in Greensboro, North Carolina and Beijing, China, and we also utilize contract suppliers and partners in Asia to test our products.

All of our key vendors and suppliers are compliant with applicable ISO 9000 or QS 9000 series specifications, which mean that their operations have in each case been determined by auditors to comply with certain

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

internationally developed quality control standards. We qualify and monitor assembly contractors based on cost and quality. These contractors typically provide us with per-unit pricing.

During fiscal 2007, we will continue to focus on manufacturing cost reductions and internal manufacturing capability in order to maximize potential growth and profitability.

Products and Applications

We offer a broad range of standard and custom-designed RF components and system-level solutions. Custom-designed products are usually developed for volume production orders from large OEMs. Custom products are normally manufactured on an exclusive basis for a negotiated period. We attempt to convert custom products into standard products in order to broaden our customer base and leverage our design and product expenditures. Our RF component products and our system-level solutions represented approximately 80% and 20%, respectively, of our total fiscal 2006 revenue.

RF Component Products

PAs  — PAs provide signal amplification in the transmitter section of a wireless system in order to boost a signal through the antenna. PAs operate at different frequencies, power levels and air interface standards and generally are classified either as linear amplifiers, which add a minimum amount of distortion to the shape of the input signal, or non-linear amplifiers, which are used in analog devices. When combined with the transmit switch function, the component is referred to as a transmit module or front-end module.

Gain Blocks (General Purpose Amplifiers)  — Gain blocks are simple general-purpose amplifiers that boost signals over a broad frequency range. They are used for amplifier applications whenever noise is not a concern and whenever a signal’s strength has been diminished by processing through a filter or other component .

Low-Noise Amplifiers/ Mixers (Front-Ends and Mixers)  — A low-noise amplifier is a device in the receiver section of a wireless system that receives signals from an antenna at extremely low microvolt levels and amplifies the signals by a factor of approximately 10 to 1,000 with the addition of as little interference as possible. Low noise amplifiers are commonly integrated into circuits with mixers (also referred to as “down-mixers” or “down converters”), and this combination generally is referred to as a “receiver front-end.” Mixers accept the filtered output from the low-noise amplifiers, which is typically at a high frequency and difficult to process, and mix it with a local oscillator signal to produce a lower intermediate frequency (IF) signal, which is easier to process.

Quadrature Modulators/ Demodulators  — Quadrature modulators are devices in the transmitter section of a wireless system that combine digital information with a RF signal by varying the phase and amplitude of the signal so that the resulting signal can be transmitted. Quadrature demodulators reverse this process in the receiver section by taking received RF signals and recovering the embedded digital information for further processing.

Other

Our other component products consist of IF components, attenuators and switches, voltage controlled oscillators and linear cable television amplifiers.

System-Level Solutions

Cellular Transceivers  — Our cellular transceiver solutions for cellular systems combine a highly integrated radio transceiver with PA, switch and filtering for operation under the GSM, GPRS and EDGE interface standards. This family of products provides handset manufacturers the benefits of reduced component count, small size and exceptional RF performance at a lower cost of implementation.

Bluetooth ® Radio Processors, Radio Modems and Software — Bluetooth ® technology is an open specification for short-range wireless communication of voice and data between devices such as mobile phones, wireless headsets, personal computers, PDAs and other portable devices. Our family of single-chip Bluetooth ® devices and software provides a complete solution for manufacturers who wish to integrate Bluetooth ® technology into their products.

Global Positioning System Receiver/ Chipset  — A GPS receiver processes signals from visible GPS satellites broadcasting RF navigation information. The GPS receiver works with a wide variety of end products including handheld, marine and in-vehicle automotive devices. A GPS chipset enables systems to receive signals from GPS satellites using signal-processing techniques that produce highly accurate, smoothed navigation data.

Raw Materials

We purchase numerous production component parts, such as passive components, and substrates from external suppliers. We currently use independent foundries to supply all of our silicon-based requirements and a portion of pHEMT product requirements. The use of external suppliers involves a number of risks, including the possibility of material disruptions in the supply of key components and the lack of control over delivery schedules, manufacturing yields, quality and fabrication costs. In order to alleviate our dependence on external suppliers, we are integrating into our semiconductor die the functionality formerly fulfilled by externally sourced components. However, we continue to

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

aggregate additional functionality and technologies into our products and this could increase our dependence on external suppliers for components.

Customers

Sales to our largest customers, Nokia and Motorola, were approximately $289.9 million and $152.9 million, respectively, in fiscal 2006, which represented approximately 38 percent and 20 percent, respectively, of our revenue.

During fiscal 2006, we continued to diversify our customer base and we expect that customer diversification will continue in fiscal 2007 as we continue to diversify our business into markets outside handsets.

Sales and Marketing

We sell our products worldwide directly to customers as well as through a network of domestic and foreign sales representative firms and distributors. We select our domestic and foreign sales channels based on technical skills and sales experience, as well as the presence of complementary product lines and the customer base served. We provide ongoing training to our representatives and distributors to keep them informed of and educated about our products. We maintain an internal marketing organization that is responsible for key account management, application engineering support to customers, developing sales and advertising literature, such as product announcements, catalogs, brochures and magazine articles in trade and other publications, and preparing technical presentations for industry conferences. We have sales and customer support centers located throughout the world. During fiscal 2006, we continued to add resources to help us to sell system-level solutions, such as Bluetooth ® products and POLARIS tm TOTAL RADIO tm solutions, which are more complex and require higher levels of technical expertise from our sales employees in order to integrate with our customers’ handsets.

We believe that maintaining a close relationship with customers and providing customers with ongoing technical support is essential to customer satisfaction in the wireless communications industry. Our applications engineers interact with customers during all stages of design and production, provide customers with current product application notes and engineering data, maintain regular contact with customer engineers and assist in the resolution of technical problems. We assign to our largest customers a contract account manager who maintains regular contact with the customer to determine its product needs and concerns. Members of senior management also are involved in managing relationships with significant customers. We believe that maintaining close contact with customers improves their level of satisfaction and enables us to anticipate their future product needs.

Research and Development

Our research and development efforts are focused primarily on developing new products and new manufacturing technologies. We currently operate design centers that are located throughout the world, in addition to our design engineering headquarters in Greensboro, North Carolina.

Our design staff is continually developing solutions for new and emerging wireless applications. Our research and development activities include not only new circuit designs, but also the development and refinement of proprietary design tools and models to facilitate new product development. Moreover, we are continually evaluating new circuits and emerging semiconductor process technologies to meet our customers’ future wireless equipment needs and to augment our Optimum Technology Matching ® strategy. As part of this strategy, we utilize multiple semiconductor process technologies in order to offer our customers products that best meet their performance, cost and time-to -market requirements. Our Advanced Development Group focuses on next-generation technologies in the areas of design, packaging, semiconductor processes and radio systems architecture. The purpose of this group is to develop innovative technologies prior to our customers’ needs and to allow our product development cycles to be more repeatable, which often results in the commercialization of new technologies.

In fiscal 2006, 2005 and 2004, we incurred approximately $168.9 million, $156.5 million and $128.2 million, respectively, in research and development expenses. We do not separately account for customer-sponsored research and development expenses from research and development expenses paid directly by us.

The market for our products is characterized by rapid changes in product designs and the emergence of new technologies. Because the demand by customers for continual improvements in product performance is expected to continue, we believe that our future success depends in part on our ability to design products using emerging technologies that meet the cost and performance parameters of our customers. Moreover, we believe that we must be able to continue to attract and retain qualified research and development personnel.

Competition

We face competition from several companies engaged in the business of designing, manufacturing and selling RF components, as well as suppliers of module products and total systems solutions. We also experience competition for products manufactured using GaAs HBT process technology from companies that have or may develop GaAs HBT or other fabrication processes.

The industry is characterized by rapid advances in technology and new product introductions. Our competitiveness depends on our ability to improve our products

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

and processes faster than our competitors, anticipate changing customer requirements, and successfully develop and launch new products, while reducing our cost. Our competitiveness is also affected by the quality of customer service, technical support and our ability to design customized products that address each customer’s particular requirements within the customer’s cost limitations. Many of our current and potential competitors have entrenched market positions, established patents, copyrights and other intellectual property rights and substantial technological capabilities. In some cases, our competitors are also our customers or suppliers. Further, many of our competitors may have significantly greater financial, technical, manufacturing and marketing resources than we do.

Intellectual Property

It is our practice to seek U.S. patent and copyright protection on our products and developments, where appropriate, and to protect our proprietary technology under U.S. and foreign laws affording protection for trade secrets and for integrated circuit designs. We own 92 U.S. patents bearing on RF communications and related circuits and semiconductor processes, the earliest of which will expire in 2015. Additional patent applications are pending, although it is possible that the inventions referenced in patent applications will not mature to issued patents. Issued patents can be found to be invalid or unenforceable under numerous legal principles.

We have numerous trademark registrations and applications pending in the United States and throughout the world. We seek registrations for our primary trademarks, servicemarks and trade names; however, others may have trademark rights superior to ours in certain jurisdictions, and in some instances our designations may not be viewed as sufficiently distinctive to warrant exclusive trademark protection. We believe that we have the right to use our selected designations, and that these designations are distinctive and capable of trademark protection. Nevertheless, if our marks are successfully challenged on this basis, it is possible that we will not be permitted to operate in a jurisdiction under our trademark, servicemark or trade name or that we will not have the exclusive right to use these designations.

We also rely upon trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. To protect our trade secrets, technical know-how and other proprietary information, our employees are required to enter into agreements providing for maintenance of confidentiality and the assignment of rights to inventions made by them while in our employ. We also have entered into non-disclosure agreements to protect our confidential information delivered to third parties in conjunction with possible corporate collaborations and for other purposes. However, we cannot be sure that these types of agreements will effectively prevent unauthorized disclosure of our confidential information, that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.

We have been named a defendant in a patent infringement lawsuit filed on August 3, 2001, in the U.S. District Court for the District of Arizona by Lemelson Medical, Education & Research Foundation, LP. The suit alleges that we have infringed claims of a total of at least 17 and possibly 18 patents, including “machine vision” claims of 12 patents, “bar code” claims of seven patents (some of which are the same as the 12 “machine vision” patents) and “integrated circuit” claims of three or four patents and seeks injunctive relief, damages for the alleged infringements and payment of the plaintiff’s attorneys’ fees. This case was stayed pending resolution of one of two related actions to which we are not a party. This case was stayed before any discovery and is in its very preliminary stages. In one of the related actions, a U.S. District Judge ruled that claims of 14 patents (each patent being among those patents at issue in the Company’s litigation) were unenforceable and invalid. On September 9, 2005, the Federal Circuit upheld the U.S. District Judge’s ruling that claims of the 14 patents are unenforceable. On December 22, 2005, the plaintiff, Lemelson Medical, Education & Research Foundation, LP, filed a motion with the United States District Court for the District of Arizona to dismiss the case as to the 14 patents that have been held unenforceable by the Federal Circuit. There are four patents remaining at issue in the litigation. We have not been notified that the stay has been lifted.

We have on occasion been made aware that aspects of our technology may overlap technology discussed or claimed in issued U.S. patents. On these occasions, we have attempted to investigate thoroughly the underlying issues and determine whether design changes or patent licenses were appropriate.

Seasonality

Sales of our products are subject to seasonal fluctuation with sales historically strongest in our third fiscal quarter and weakest in our fourth fiscal quarter. However, in our fiscal 2006 fourth quarter, we achieved increased sales of transceiver modules and transmit modules as well as PA market share gains, which offset our typical seasonality. The seasonality of our sales reflects seasonal demand fluctuations for the products that incorporate RF components and system-level solutions, such as mobile handsets. If anticipated sales or shipments do not occur when expected, expenses and inventory levels in that quarter can be disproportionately high, and our results of operations for that quar-

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

ter, and potentially for future quarters, may be adversely affected.

Backlog

Due to industry practice and our experience, we do not believe that backlog as of any particular date is indicative of future results. Our sales are the result of consumption of custom products from consigned inventory held by our customers and from purchase orders for delivery of standard and custom products. The quantities projected for consumption of consigned inventory, quantities on purchase orders, as well as the shipment schedules, are frequently revised within agreed-upon lead times to reflect changes in the customer’s needs.

Employees

At April 30, 2006, we had 3,011 employees. We believe that our future prospects will depend, in part, on our ability to continue to attract and retain skilled technical, marketing and management personnel. Competition for such personnel is intense, and the number of persons with relevant experience, particularly in engineering, product design and technical marketing, is limited. None of our employees is represented by a labor union, and we have never experienced any work stoppage. We believe that our current employee relations are good.

Geographic Financial Summary

A summary of our operations by geographic area is as follows (in thousands):

Year Ended March 31,		2006			2005			2004
Sales:
	United States		$	113,200			$	102,152			$	121,441
	International			657,047				532,052				529,938
Long-lived assets:
	United States		$	303,358			$	305,988			$	262,707
	International			37,935				33,636				17,649

Of our total revenue for fiscal 2006, approximately 15 percent was for customers in the United States, 21 percent for customers in China, 17 percent for customers in Europe, 15 percent for customers in Singapore, 12 percent for customers in Taiwan and 11 percent for customers in Korea. Customers in Central and South America and Japan accounted for the majority of the remaining fiscal 2006 revenue.

Sales, for geographic disclosure purposes, are based on the “bill to” address of the customer. The “bill to” address is not always an accurate representation of the location of final consumption of our products. Long-lived assets include property and equipment and at March 31, 2006, approximately $35.0 million (or 10.2%) of our total property and equipment was located in China.

Environmental Matters

By virtue of operating our MBE and wafer fabrication facilities, we are subject to a variety of extensive and changing federal, state and local governmental laws, regulations and ordinances related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in the manufacturing process. Any failure to comply with such requirements currently in effect or subsequently adopted could result in the imposition of fines on us, the suspension of production or a cessation of operations, the occurrence of which could have an adverse impact upon our capital expenditures, earnings and competitive position. In addition, such requirements could restrict our ability to expand our facilities or require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations. We believe that costs arising from existing environmental laws will not have a material adverse effect on our financial position or results of operations. We are an ISO 14001:2004 certified manufacturer with a comprehensive Environmental Management System (EMS) in place in order to assure control of the environmental aspects of the manufacturing process. EMS mandates compliance and establishes appropriate checks and balances to minimize the potential for non-compliance.

We actively monitor the hazardous materials that are used in the manufacture and assembly and testing of our products, particularly materials that end up in the final product. We have developed specific restrictions on the content of certain hazardous materials in our products, as well as those of our suppliers and outsourced manufacturers and subcontractors. These efforts to reduce hazardous substances in our products have positioned us well to meet the various environmental restrictions on product content throughout the world, such as the Restriction on Hazardous Substances (RoHS) directive in the European Union (EU). The RoHS directive restricts most uses of lead, cadmium, hexavalent-chromium, mercury and certain fire retardants in electronics put on the market after July 1, 2006. As of March 31, 2006, the conversion of products targeted for RoHS compliance has been completed.

There can be no assurance that the environmental laws will not become more stringent in the future or that we will not incur significant costs in the future in order to comply with these laws. We do not currently anticipate any material capital expenditures for environmental control facilities for the remainder of fiscal year 2007 or fiscal year 2008.

Access to Public Information

We make available, free of charge through our website (http://www.rfmd.com), our Annual Report on Form  10-K, Quarterly Reports on Form  10-Q and Current Reports on Form  8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file these reports with, or furnish them to, the Securities and Exchange Commission (SEC). The public may also request a copy of our forms filed with the SEC, without charge upon written request, directed to:

Investor Relations Department

RF Micro Devices, Inc.

7628 Thorndike Road

Greensboro, NC 27409-9421

In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. You may also read and copy any documents that we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room.

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

ITEM 1A. RISK FACTORS " -->
ITEM 1A.    RISK FACTORS

This  10-K includes “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts and typically are identified by use of terms such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar words, although some forward-looking statements are expressed differently. You should be aware that the forward-looking statements included herein represent management’s current judgment and expectations, but our actual results, events and performance could differ materially from those expressed or implied by forward-looking statements. We do not intend to update any of these forward-looking statements or publicly announce the results of any revisions to these forward-looking statements, other than as is required under the federal securities laws. Our business is subject to numerous risks and uncertainties, including variability in quarterly operating results, the rate of growth and development of wireless markets, risks associated with the operation of our wafer fabrication facilities, molecular beam epitaxy facility, our assembly facility and our test and tape and reel facilities, our ability to attract and retain skilled personnel and develop leaders, variability in production yields, our ability to reduce costs and improve gross margins by implementing innovative technologies, our ability to bring new products to market, our ability to adjust production capacity in a timely fashion in response to changes in demand for our products, dependence on a limited number of customers and dependence on third parties. These and other risks and uncertainties, which are described in more detail below, could cause actual results and developments to be materially different from those expressed or implied by any of these forward-looking statements.

Our industry’s technology changes rapidly and we depend on the development and growth of the wireless markets.

We depend on the development and growth of markets for wireless communications products and services. We cannot be sure about the rate at which markets for these products will develop or our ability to produce competitive products for these markets as they develop. In particular, in fiscal 2006, the market adoption of EDGE, the execution on our product development efforts, and the success of our customers with EDGE-based products was a significant factor in our revenue growth. In fiscal 2007, the continued growth of our POLARIS tm TOTAL RADIO tm transceiver solutions, our next-generation transmit modules and Bluetooth ® solutions will be significant factors in our revenue growth.

We supply RF components and system-level solutions primarily for wireless applications. The wireless markets are characterized by frequent introduction of new products and services in response to evolving product and process technologies and consumer demand for greater functionality, lower costs, smaller products and better performance. As a result, we have experienced and will continue to experience some product design obsolescence. We expect our customers’ demands for improvements in product performance to continue, which means that we must continue to improve our product designs and develop new products that may use new technologies. It is possible that competing technologies will emerge that permit the manufacture of integrated circuits that are superior to the products we make under existing processes. If that happens and we cannot design products using that technology or develop competitive products, our operating results will be adversely affected.

To remain competitive in our silicon-based products, we expect to continue to transition our silicon semiconductor products to increasingly smaller line width geometries, and as smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property and software, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all.

We face risks associated with the operation of our manufacturing facilities.

We operate one MBE facility and two wafer fabrication facilities. We currently use several international and domestic assembly suppliers, as well as our internal assembly facility in Beijing, China, to assemble our products. We currently have our own test and tape and reel facilities located in Greensboro, North Carolina, and Beijing, China, and we also utilize contract suppliers and partners in Asia to test our products.

A number of factors will affect the future success of our facilities, including the following:

•	demand for our products;
•	our ability to expand our facilities in a timely manner with acceptable yields;
•	our ability to generate revenues in amounts that cover the significant fixed costs of operating the facilities;
•	our ability to qualify our facilities for new products in a timely manner;
•	the availability of raw materials, including GaAs substrates, and high purity source materials such as gallium, aluminum, arsenic, indium, silicon, phosphorous and beryllium;
•	our manufacturing cycle times;
•	our manufacturing yields;

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

•	the political and economic risks associated with the increased reliance on our assembly, test and tape and reel operation in Beijing, China;
•	our reliance on one qualified MBE facility;
•	the location of our two wafer fabrication facilities in the same geographic area;
•	our ability to hire, train and manage qualified production personnel;
•	our compliance with applicable environmental and other laws and regulations; and
•	our ability to avoid prolonged periods of down-time in our facilities for any reason.

We face challenges managing the expansion of our employee base.

To manage our growth effectively, we must:

•	develop leaders for key business units and functions;
•	expand our presence in international locations and adapt to cultural norms in foreign locations;
•	train and manage our employee base; and
•	attract and retain qualified people with experience in RF engineering, integrated circuit design, software and technical marketing and support.

Competition for these technical resources is intense. We must also manage multiple relationships with various customers, business partners and other third parties, such as our foundry, assembly, test and tape and reel partners. Our systems, networks, software tools, or procedures may not be adequate to support our operations, and we may not be able to expand quickly enough to exploit potential market opportunities. Our future operating results and success may also depend on keeping key technical personnel and management and expanding our sales and marketing, research and development and administrative support. We do not have employment agreements with the majority of our employees. We must also continue to attract qualified personnel. The competition for qualified personnel is intense, and the number of people with experience, particularly in RF engineering, integrated circuit design, and technical marketing and support, is limited. We cannot be sure that we will be able to attract and retain other skilled personnel in the future.

We depend heavily on third parties.

We purchase numerous component parts, such as pHEMT die and passive components, as well as substrates and silicon-based products, from external suppliers. The use of external suppliers involves a number of risks, including the possibility of material disruptions in the supply of key components and the lack of control over delivery schedules, capacity constraints, manufacturing yields, quality and fabrication costs.

We currently use several external manufacturing suppliers, as well as our internal manufacturing facilities in Beijing, China, for assembly, test and tape and reel requirements. All of our key vendors and suppliers are compliant with applicable ISO 9000 or QS 9000 standards. However, if these vendors’ processes vary in reliability or quality, they could negatively affect our products and, therefore, our results of operations.

We currently have manufacturing capabilities in Greensboro, North Carolina and Beijing, China, and we also utilize contract suppliers and partners in Asia. We expect to increase our reliance on our Beijing facility as well as our utilization of contract suppliers and partners in Asia in order to minimize the movement of inventory, which improves cycle time and results in lower levels of inventory.

Our operating results fluctuate.

Our revenue, earnings and other operating results have fluctuated significantly in the past and may fluctuate significantly in the future. Our future operating results will depend on many factors, including the following:

•	our ability to accurately predict market requirements and evolving industry standards in a timely manner;
•	our ability to accurately predict customer demand and thereby avoid the possibility of obsolete inventory, which would reduce our profit margins;
•	the ability of third party foundries, assembly, test and tape and reel partners to handle our products in a timely and cost-effective manner that meets our customers’ requirements;
•	our ability to achieve cost savings and improve yields and margins on our new and existing products;
•	our ability to respond to possible downward pressure on the average selling prices of our products caused by our customers or our competitors;
•	our ability to efficiently utilize our capacity in response to customer demand;
•	our ability to successfully complete the ongoing efforts of certain cost-reduction actions; and
•	our ability to successfully integrate and realize expected synergies from our acquisitions.

It is likely that our future operating results will be adversely affected by the factors set forth above or other factors. If our future operating results are below the expectations of stock market analysts or our investors, our stock price may decline.

Our operating results could vary as a result of the methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part II, Item 7 of this Form  10-K). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments which could significantly affect our results of operations. In particular, beginning in our first quarter of fiscal 2007, the calculation of share-based

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

compensation expense under SFAS 123(R) will require us to use valuation methodologies and a number of assumptions, estimates and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock and the exercise behavior of our employees. Furthermore, there are no means under applicable accounting principles to compare and adjust or expense if and when we learn of additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards. Factors may arise over time that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted share-based compensation expense could impact our gross margin percentage, research and development expenses, marketing and selling expenses, general and administrative expenses, and our tax rate.

If we experience poor manufacturing yields, our operating results may suffer.

Our products are very complex. Each product has a unique design and is fabricated using semiconductor process technologies that are highly complex. In many cases, the products are assembled in customized packages. Our products, which primarily consist of multiple components in a single package, feature enhanced levels of integration and complexity. Our customers insist that our products be designed to meet their exact specifications for quality, performance and reliability. Our manufacturing (logistics) yield is a combination of yields across the entire supply chain including wafer fabrication, assembly, and test yields.

Due to the complexity of our products, we periodically experience difficulties in achieving acceptable yields on certain new and existing products.

Our customers also test our components once they have been assembled into their products. The number of usable products that result from our production process can fluctuate as a result of many factors, including the following:

•	design errors;
•	defects in photomasks, which are used to print circuits on a wafer;
•	minute impurities in materials used;
•	contamination of the manufacturing environment;
•	equipment failure or variations in the manufacturing processes;
•	losses from broken wafers or other human error; and
•	defects in packaging.

We seek to improve our manufacturing yields. Typically, for a given level of sales, when our yields improve, our gross margins improve, and when our yields decrease, our unit costs are higher, our margins are lower, and our operating results are adversely affected. During fiscal 2006, we improved our final test yields and during fiscal 2007, we expect to focus additional efforts on improving our total logistics yield.

We depend on a few large customers for a substantial portion of our revenue.

Historically, a substantial portion of our revenue has come from large purchases by a small number of customers and we expect that trend to continue. Our future operating results depend on both the success of our largest customers and on our success in diversifying our products and customer base.

We typically manufacture custom products on an exclusive basis for individual customers for a negotiated period of time. The concentration of our revenue with a few large customers makes us particularly dependent on factors affecting those customers. For example, if demand for their products decreases, they may stop purchasing our products and our operating results would suffer. Most of our customers can cease incorporating our products into their products with little notice to us and with little or no penalty. The loss of a large customer and failure to add new customers to replace lost revenue would have a material adverse effect on our business, financial condition and results of operations.

Our operating results are dependent on our GaAs HBT process technology and demand for our GaAs HBT products.

Although we design products using multiple distinct process technologies, a substantial portion of our revenue comes from the sale of products manufactured using GaAs HBT process technology. Our dependence on GaAs HBT products could have an adverse effect on our operating results in the future. Competitors offer their own GaAs products, which can adversely affect our selling prices. Also, new process technologies are being developed, and one or more of these processes could have characteristics that are superior to GaAs HBT. If we are unable to access these technologies through licenses or foundry service arrangements, we will be competitively disadvantaged. These and other factors could reduce the demand for GaAs HBT components or otherwise adversely affect our operating results.

We depend on our exclusive license from Northrop for our GaAs HBT technology. If the license is terminated for breach of contract or if it were determined that products made with this technology infringed on a third party’s intellectual property rights, our operating results would be adversely affected. Northrop made no representation to us about whether the licensed technology infringed on the intellectual property rights of anyone else.

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

We operate in a very competitive industry and must continue to implement innovative technologies and increase capacity utilization in order to reduce costs and improve margins.

We compete with several companies primarily engaged in the business of designing, manufacturing and selling RF components and system-level solutions, as well as suppliers of discrete products such as transistors, capacitors and resistors. Several of our competitors either have GaAs HBT process technology or are developing GaAs HBT or new fabrication processes. Customers could develop products that compete with or replace our products. A decision by any of our large customers to design and manufacture integrated circuits internally could have an adverse effect on our operating results. Increased competition could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. In order to improve our margins, we need to reduce our costs by making continual operational improvements to reduce cycle time, increase capacity utilization and improve test yields. Our inability to meet these objectives could have an adverse effect on our operating results.

Many of our existing and potential competitors have entrenched market positions, historical affiliations with OEM’s, considerable internal manufacturing capacity, established intellectual property rights and substantial technological capabilities. Many of our existing and potential competitors may have greater financial, technical, manufacturing or marketing resources than we do. We cannot be sure that we will be able to compete successfully with our competitors.

Our operating results are substantially dependent on development of new products.

Our future success will depend on our ability to develop new product solutions for existing and new markets. We must introduce new products in a timely and cost-effective manner and secure production orders from our customers. The development of new products is a highly complex process, and we have upon occasion experienced delays in completing the development and introduction of new products at times in the past, including during fiscal 2006. Our successful product development depends on a number of factors, including the following:

•	the accuracy of our prediction of market requirements and evolving standards;
•	acceptance of our new product designs;
•	the availability of qualified product designers;
•	our timely completion and execution on the product designs and ramp of new products according to our customer needs with acceptable manufacturing yields;
•	acceptance of our customers’ products by the market; and
•	our ability to successfully design, develop, manufacture and integrate new components, such as pHEMT switches and filters, to increase our product content.

We may not be able to design and introduce new products in a timely or cost-efficient manner, and our new products may fail to meet the requirements of the market or our customers. In that case, we likely will not reach the expected level of production orders, which could adversely affect our operating results. Even when a design win is achieved, our success is not assured. Design wins may require significant expenditures by us and typically precede volume revenues by six to nine months or more. The actual value of a design win to us will ultimately depend on the commercial success of our customers’ products.

We are subject to risks from international sales and operations.

We operate globally with sales offices and research and development activities as well as manufacturing, assembly and testing facilities in multiple countries. As a result, we are subject to risks and factors associated with doing business outside the United States. Global operations involve inherent risks that include currency controls and fluctuations as well as tariff, import and other related restrictions and regulations.

Sales to customers located outside the United States accounted for approximately 85 percent of our revenue in fiscal 2006. We expect that revenue from international sales will continue to be a significant part of our total revenue. Because the majority of our foreign sales are denominated in U.S. dollars, our products become less price-competitive in countries with currencies that are low or are declining in value against the U.S. dollar. Also, we cannot be sure that our international customers will continue to accept orders denominated in U.S. dollars. If they do not, our reported revenue and earnings will become more directly subject to foreign exchange fluctuations.

The majority of our assembly, test and tape and reel vendors are located in Asia. This subjects us to regulatory, geopolitical and other risks of conducting business outside the United States. We do business with our foreign assemblers in U.S. dollars. Our manufacturing costs could increase in countries with currencies that are increasing in value against the U.S. dollar. Also, we cannot be sure that our international manufacturing suppliers will continue to accept orders denominated in U.S. dollars. If they do not, our costs will become more directly subject to foreign exchange fluctuations.

In addition, if terrorist activity, armed conflict, civil or military unrest or political instability occur in the United States or other locations, such events may disrupt manufacturing, assembly, logistics, security and communications, and could also result in reduced demand for our products. Major health concerns could also ad-

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

versely affect our business and our customer order patterns. We could also be affected if labor issues disrupt our transportation arrangements or those of our customers or suppliers. On a worldwide basis, we regularly review our key infrastructure, systems, services and suppliers, both internally and externally, to seek to identify significant vulnerabilities as well as areas of potential business impact if a disruptive event were to occur. Once identified, we assess the risks, and as we consider it to be appropriate, we initiate actions intended to minimize the risks and their potential impact. However, there can be no assurance that we have identified all significant risks or that we can mitigate all identified risks with reasonable effort.

We may engage in future acquisitions that dilute our shareholders, cause us to incur debt and assume contingent liabilities.

As part of our business strategy, we expect to continue to review potential acquisitions that could complement our current product offerings, augment our market coverage or enhance our technical capabilities, or that may otherwise offer growth opportunities. While we currently have no definitive agreements providing for any such acquisitions, we may acquire businesses, products or technologies in the future. In the event of such future acquisitions, we could issue equity securities that would dilute our current shareholders’ percentage ownership, incur substantial debt or other financial obligations or assume contingent liabilities. Such actions by us could seriously harm our results of operations or the price of our common stock. Acquisitions also entail numerous other risks that could adversely affect our business, results of operations and financial condition, including:

•	unanticipated costs, capital expenditures or working capital requirements associated with the acquisition;
•	acquisition-related charges and amortization of acquired technology and other intangibles that could negatively affect our reported results of operation;
•	diversion of management’s attention from our business;
•	injury to existing business relationships with suppliers and customers;
•	failure to successfully integrate acquired businesses, operations, products, technologies and personnel; and
•	unrealized expected synergies.

We rely on intellectual property and face claims of infringement.

Our success depends in part on our ability to obtain patents, trademarks and copyrights, maintain trade secret protection and operate our business without infringing on the proprietary rights of other parties. The wireless industry is subject to frequent litigation, often regarding patent and other intellectual property rights. Leading companies and organizations in the wireless industry have numerous patents that protect their intellectual property rights in these areas. In the event of an adverse result of any intellectual property rights litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology covered by the litigation. We cannot be sure that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all.

In addition to patent and copyright protection, we also rely on trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. We try to protect this information by entering into confidentiality agreements with our employees and other parties. We cannot be sure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.

We may be subject to other lawsuits and claims relating to our products.

We cannot be sure that third parties will not assert product liability or other claims against us, our customers or our licensors with respect to existing and future products. Any litigation to determine the validity of any third party’s claims could result in significant expense and liability to us and divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor or covered by insurance.

We are subject to stringent environmental regulations.

We are subject to a variety of federal, state and local requirements governing the protection of the environment. These environmental regulations include those related to the use, storage, handling, discharge and disposal of toxic or otherwise hazardous materials used in our manufacturing processes. A change in environmental laws or our failure to comply with environmental laws could subject us to substantial liability or force us to significantly change our manufacturing operations. In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination.

Our stock price is subject to volatility.

The trading price of our common stock is subject to wide fluctuations in response to quarterly variations in operating results, positive or adverse business developments, changes in financial estimates by securities analysts, announcements of technological innovations, introduction of new products by us or our competitors, transactions by corporate insiders and other events and factors. In addition, the stock market has experienced extreme price and volume fluctuations based on factors outside our control that have particularly af-

RF Micro Devices, Inc. and Subsidiaries Annual Report on Form  10-K 2006

fected the market prices for many high technology companies. These broad market fluctuations may materially and adversely affect the market price of our common stock.

Future sales of shares could have an adverse effect on the market price of our common stock.

Sales of substantial amounts of common stock in the public market or the prospect of such sales could adversely affect the market price for our common stock and our ability to raise equity capital in the future. At May 22, 2006, we had outstanding a total of 191,376,007 shares of common stock. As of March 31, 2006, options to purchase approximately 22.4 million shares of common stock were outstanding under our formal stock option plans for employees and directors, with a weighted average exercise price of $7.36 per share and a weighted average remaining contractual life of 6.3 years. Of these, options to purchase 15.4 million shares were exercisable at March 31, 2006, at a weighted average exercise price of $7.98 per share.

Provisions in our governing documents could discourage takeovers and prevent shareholders from realizing an investment premium.

Certain provisions of our articles of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company. These provisions include the ability of our Board of Directors to designate the rights and preferences of preferred stock and issue such shares without shareholder approval and the requirement of supermajority shareholder approval of certain transactions with parties affiliated with our Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.

On August 10, 2001, our Board of Directors adopted a shareholder rights plan, pursuant to which uncertificated stock purchase rights were distributed to our shareholders at a rate of one stock purchase right for each share of common stock held of record as of August 30, 2001. The rights plan is designed to enhance the Board’s ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect shareholders against attempts to acquire us by means of unfair or abusive takeover tactics. The rights become exercisable based upon certain limited conditions related to acquisitions of stock, tender offers and certain business combination transactions involving us. The existence of the rights plan may impede a takeover of us not supported by the Board, including a takeover that may be desired by a majority of our shareholders or involving a premium over the prevailing stock price.

ITEM 1B. UNRESOLVED STAFF COMMENTS. " -->

ITEM 1B.  UNRESOLVED STAFF COMMENTS.
Not Applicable.